Adjusted growth revenue

What Is Adjusted Growth Revenue?

Adjusted growth revenue is a non-Generally Accepted Accounting Principles (Non-GAAP) financial measure used by companies to present their top-line performance after making specific modifications to their reported revenue. This metric falls under the broader category of Financial Metrics and specifically, Non-GAAP Financial Measures. It aims to offer stakeholders a clearer view of core operational growth by excluding items that management deems non-recurring, non-operational, or distorting to the underlying business trend. Unlike statutory revenue, which adheres strictly to Generally Accepted Accounting Principles (GAAP), adjusted growth revenue provides a supplemental perspective often highlighted in Investor Relations materials and earnings calls.

History and Origin

The practice of presenting adjusted financial metrics, including adjusted growth revenue, gained prominence as businesses sought to provide insights beyond the strictures of GAAP. While GAAP provides a standardized framework for preparing Financial Statements, the complexity of modern business operations—including mergers, acquisitions, and restructuring—often results in significant one-time or non-cash items that can obscure a company's ongoing performance. The rise of these adjustments became more widespread, leading regulatory bodies like the Securities and Exchange Commission (SEC) to issue guidance on their use. The SEC's Division of Corporation Finance has frequently commented on the presentation of non-GAAP financial measures, reflecting an ongoing focus on ensuring these metrics are not misleading to investors. For⁷ example, the SEC has provided guidance on which adjustments could lead to a misleading non-GAAP measure, such as excluding normal, recurring, cash operating expenses. Com⁶panies are required to reconcile non-GAAP measures to the most comparable GAAP measure and explain why management believes the non-GAAP presentation provides useful information. The⁵ increasing prevalence and scrutiny of these measures underscored a need for greater transparency and consistency in financial reporting, particularly following significant changes to Revenue Recognition standards like ASC 606.

##⁴ Key Takeaways

• Adjusted growth revenue is a non-GAAP financial measure designed to show a company's revenue growth excluding specific items.
• It offers a management's perspective on core business performance, often removing non-recurring or non-operational revenue impacts.
• Companies use adjusted growth revenue to provide a more consistent view of underlying trends, particularly for Public Companies communicating with investors.
• Regulatory bodies like the SEC monitor the use of adjusted metrics to prevent misleading disclosures, requiring reconciliation to GAAP figures.
• It serves as a supplementary metric to GAAP revenue, not a replacement.

Formula and Calculation

The formula for adjusted growth revenue typically involves starting with GAAP revenue and then adding back or subtracting specific items. There is no single universal formula for adjusted growth revenue, as the adjustments are company-specific and depend on what management considers non-representative of core operations.

A general representation might be:

$\text{Adjusted Revenue} = \text{GAAP Revenue} \pm \text{Specific Adjustments}$

To calculate the adjusted growth revenue, the adjusted revenue from the current period is compared to the adjusted revenue from a prior period.

$\text{Adjusted Growth Revenue (\%)} = \frac{\text{Adjusted Revenue}_{\text{Current Period}} - \text{Adjusted Revenue}_{\text{Prior Period}}}{\text{Adjusted Revenue}_{\text{Prior Period}}} \times 100$

Common adjustments may include:

• Acquisition-related revenue: Revenue from businesses acquired during the period, which might be excluded to show organic growth.
• Divestiture-related revenue: Revenue lost from businesses sold, which might be excluded from prior periods for comparability.
• One-time contract gains or losses: Unusual or non-recurring revenue items from specific contracts.
• Impact of significant accounting changes: Adjustments made to align revenue recognition for comparability across periods, especially during transitions to new accounting standards.

Each adjustment should be clearly defined, and the calculation reconciled to the GAAP Income Statement figures.

Interpreting the Adjusted Growth Revenue

Interpreting adjusted growth revenue requires understanding the rationale behind the specific adjustments made by management. This metric is intended to provide a cleaner view of how the underlying business is expanding without the noise of extraordinary items. For instance, a company might exclude revenue from a recently divested segment to highlight the growth of its continuing operations. When evaluating adjusted growth revenue, investors often compare it to the reported GAAP Revenue Growth to identify discrepancies and understand management's narrative. It is crucial to review the accompanying Management's Discussion and Analysis (MD&A) section of financial reports, where companies explain their non-GAAP adjustments and reconcile them to GAAP figures. This provides context for the choices made and helps in conducting thorough Financial Analysis.

Hypothetical Example

Consider a hypothetical software company, "InnovateTech Inc." In 2024, InnovateTech reported GAAP revenue of $500 million. During the year, it completed the acquisition of "LegacySoft," which contributed $50 million in revenue since the acquisition date. In 2023, InnovateTech's GAAP revenue was $400 million, with no significant acquisitions.

To calculate adjusted growth revenue, InnovateTech's management decides to exclude the acquired revenue from LegacySoft to showcase its organic growth.

2024 Adjusted Revenue Calculation:
GAAP Revenue (2024) = $500 million
Less: Revenue from LegacySoft acquisition = $50 million
Adjusted Revenue (2024) = $500 million - $50 million = $450 million

2023 Adjusted Revenue (for comparability):
GAAP Revenue (2023) = $400 million
(No adjustments needed as there were no similar events in 2023)
Adjusted Revenue (2023) = $400 million

Adjusted Growth Revenue Calculation:
$\text{Adjusted Growth Revenue (\%)} = \frac{(\$450 \text{ million} - \$400 \text{ million})}{\$400 \text{ million}} \times 100$
$\text{Adjusted Growth Revenue (\%)} = \frac{\$50 \text{ million}}{\$400 \text{ million}} \times 100 = 12.5\%$

In contrast, the GAAP revenue growth would be:
$\text{GAAP Growth Revenue (\%)} = \frac{(\$500 \text{ million} - \$400 \text{ million})}{\$400 \text{ million}} \times 100$
$\text{GAAP Growth Revenue (\%)} = \frac{\$100 \text{ million}}{\$400 \text{ million}} \times 100 = 25.0\%$

In this example, InnovateTech's adjusted growth revenue of 12.5% provides a picture of its organic revenue expansion, excluding the boost from the LegacySoft acquisition. This contrasts with the 25.0% GAAP revenue growth, which includes the acquisition's impact. Investors reviewing these figures would gain insight into both the total growth and the underlying operational growth.

Practical Applications

Adjusted growth revenue is commonly employed in various financial contexts to provide a more tailored view of a company's performance.

• Financial Reporting and Earnings Releases: Companies frequently include adjusted growth revenue in their quarterly and annual earnings releases, often alongside GAAP figures, to highlight specific aspects of their business trajectory. This is particularly common when Operating Expenses or revenue streams are significantly impacted by non-recurring events.
• Investor Presentations: Management teams use adjusted growth revenue to articulate their strategic narrative during investor conferences and roadshows, emphasizing long-term growth trends free from temporary distortions.
• Analyst Models: Financial analysts often incorporate adjusted revenue figures into their valuation models to better forecast future performance, excluding volatile or one-off items. They might use this to derive more stable metrics like Earnings Per Share on an adjusted basis.
• Internal Performance Measurement: Internally, companies may use adjusted growth revenue targets to evaluate the performance of business units or management, aligning incentives with core operational growth rather than one-time events.
• Comparability: This metric can enhance comparability between companies, especially in industries prone to frequent mergers, acquisitions, or significant divestitures, by allowing a focus on the underlying organic growth. The SEC continues to amend disclosure requirements to improve the quality of information provided, including changes related to net sales/revenues.

##³ Limitations and Criticisms

While adjusted growth revenue can offer valuable insights, it is not without limitations and criticisms. A primary concern is the potential for manipulation or misrepresentation. Since adjusted growth revenue is a non-GAAP measure, companies have discretion over what adjustments they make, which can lead to a less standardized comparison across different companies or even over time for the same company.

• Lack of Standardization: The absence of a universal standard for calculating adjusted growth revenue means that each company defines its own "adjustments." This lack of comparability can complicate Financial Analysis and make it difficult for investors to assess true performance across peers.
• Potential for Misleading Practices: Critics argue that companies may selectively exclude certain items to present a more favorable financial picture, potentially masking underlying operational issues or recurring costs that are essential for business operations. The SEC has explicitly warned against non-GAAP measures that exclude normal, recurring, cash operating expenses.
• ² Transparency Concerns: While reconciliation to GAAP is required, the sheer number and complexity of adjustments can make it challenging for investors to fully understand how the adjusted growth revenue is derived and its relationship to the official Net Income and revenue figures. The SEC staff continues to issue comments to registrants regarding compliance with non-GAAP disclosure rules, highlighting issues like the appropriateness of adjustments and proper labeling.
• ¹ Focus on "What If": Adjusted metrics can sometimes shift focus from the actual reported results to a hypothetical "what if" scenario, which might not fully reflect the economic reality faced by the company.
• Ignoring True Costs: For instance, if a company consistently incurs large restructuring charges or acquisition-related costs, excluding these from adjusted growth revenue might obscure the fact that these are, in practice, a recurring part of the company's business model. This can impact perceptions of long-term Shareholder Value.

Adjusted Growth Revenue vs. GAAP Revenue Growth

Adjusted growth revenue and GAAP revenue growth both measure changes in a company's sales over time, but they differ fundamentally in their adherence to accounting standards and their purpose.

The key difference lies in the adjustments. GAAP revenue growth is the raw, unadjusted percentage change in total sales as reported on the Income Statement, adhering to strict accounting rules. Adjusted growth revenue, conversely, starts with GAAP revenue but then modifies it by adding back or subtracting items that management believes are not indicative of the company's ongoing operational performance. While adjusted growth revenue aims to provide a more "clean" view, GAAP revenue growth provides the official, verifiable figure for all stakeholders. Investors often use both metrics in tandem to get a comprehensive view of a company's financial health.

FAQs

What is the primary purpose of adjusted growth revenue?

The primary purpose of adjusted growth revenue is to provide investors and analysts with a clearer, more focused view of a company's ongoing operational performance by excluding certain non-recurring, unusual, or non-cash items from its reported revenue figures. It aims to highlight the underlying business trend.

Is adjusted growth revenue audited?

While the underlying GAAP revenue figures are audited as part of a company's financial statements, the specific adjustments made to arrive at adjusted growth revenue are generally not subject to the same level of formal audit scrutiny. However, public companies are required by the Securities and Exchange Commission (SEC) to reconcile these non-GAAP measures to their most comparable GAAP equivalents and explain the adjustments.

Why do companies use adjusted growth revenue if GAAP revenue already exists?

Companies use adjusted growth revenue to supplement GAAP figures because GAAP, while standardized, may not always fully capture the operational essence of a business, especially after significant events like acquisitions, divestitures, or one-time charges. Adjusted growth revenue can help management communicate their view of core performance and growth, offering insights that might otherwise be obscured in the GAAP presentation, aiding in Financial Analysis.

Can adjusted growth revenue be misleading?

Yes, adjusted growth revenue can be misleading if the adjustments are not clearly explained, are inconsistent over time, or exclude truly recurring Operating Expenses or revenue items that are integral to the business. The SEC provides guidance to prevent such misleading presentations, emphasizing the need for transparent reconciliation and a clear rationale for all adjustments.